The building society said that the March fall represented a "sharp slowing" and dragged the quartely drop in prices - considered a less volatile gauge of the market - down to 1.5pc. As recently as October prices over three-months had grown 1.5pc, signalling how rapidly the situation has deteriorated.

Nationwide now thinks that house prices could fall by as much as 4pc in 2008, whereas it previously predicted they would remain flat.

Housebuilders fell across the board in early trading in respons to the gloomy survey. Persimmon, Taylor Wimpey and Barratt were all down 5pc.

In a further sign of a tougher housing market and tightening of lending criteria, Nationwide yesterday withdrew some of its best deals from the mortgage market.

A full-blown recession in the UK is now a 35pc probability according to experts at Lehman Brothers, as the impact of the credit crunch spreads further into the housing market and broader economy.

The growing gloom over the economy is driving voters away from the Labour Party, an opinion poll for The Daily Telegraph shows today.

The public's confidence in the economy - the "feel-good factor" - has dropped to its lowest level recorded according to the YouGov poll.

Nationwide and some economists now think that because conditions in the financial markets worsened in March, the Bank of England will bring forward plans for a rate cut to April.

Many had expected a cut in May, but the near-collapse of Bear Stearns, the increasing likelihood of recession in the US, and dwindling consumer confidence in the UK have increased the likelihood of an earlier cut.

Fionnuala Earley, Nationwide's chief economist said: "The outlook for UK house prices is clearly more downbeat than at the time of our November forecast. Some of the downside risks we identified then have become a reality - most notably the continued turmoil in the financial markets."

Howard Archer, chief economist at Global Insight, said that the escalation of the credit crunch, tighter lending criteria and an expectation from buyers and sellers that house prices will fall sharply, could prompt a "sharp" correction to the housing market.

The news that UK prices continue to fall is a further blow to homeowners whose ability to get cheaper mortgages is dwindling as lenders tighten criteria.

Yesterday Nationwide said it would raise the rates on all fixed-rate products by 0.2pc and increase some tracker mortgages by up to 0.57pc.

The Telegraph Investor

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